Darden Earnings: Solid Margin Offsets Soft Sales in Our Eyes; Shares Still Pricey Despite Pullback

Narrow-moat Darden reported decent fiscal third-quarter results, with $2.98 billion in sales narrowly missing our $3.03 billion estimate, but with $2.62 in adjusted EPS edging our $2.55 forecast. It was disappointing to see declining traffic in the firm's Olive Garden and Longhorn segments en route to a 1% consolidated comparable store sales decline as well as to see a downward revision to full-year same restaurant sales guidance (midpoint growth to 1.75% from 3%). That said, the pressure wasn't entirely unforeseen, given a sharp 6.5% decline in full-service restaurant traffic over the past three months (BlackBox Intelligence). During the most recent quarter, restaurants that have exhibited sales softness have been thoroughly punished by the market, and a 5%-6% decline in March 21 trading suggests that Darden is no exception. After weighing the firm’s results, we expect to raise our $146 fair value estimate by a low-single-digit percentage, consistent with time value, leaving shares trading at about a 10% premium.